How sweet, then, that on Monday – as China confirmed its slower growth – the French dairy group should release better than expected third-quarter sales boosted by strong demand for a core product in China. Danone has milked Chinese parents’ preference for premium imported baby formula since the country’s milk safety scandals. Global like-for-like sales of «early life nutrition» rose almost 11 per cent, driven by online purchases in China.
Can this feeding frenzy last? Maybe not at this pace, given the high base of ELN sales set a year ago, when they rose more than 19 per cent. Swiss rival Nestlé last week reduced its full-year sales guidance, in part on weaker demand in China. Yet the country’s shift from a production-based to a consumer-driven economy ought to support Danone’s market share. And removal of China’s one-child policy would be bullish in a market that speaks for about three-quarters of the French group’s baby formula sales. But it will need to be as smart as its online Chinese customers: hence its plan to sell ELN through specialised stores and establish a «local internet offering».
So much for China. A bigger issue for Danone boss Emmanuel Faber is to check the decline in fresh dairy products. These still account for almost half of group sales. The European market is weak but showing signs of recovery, growth is still disappointing in North America and Russia is Russia. However Danone has pricing power: while global volume contracted 3.3 per cent, Danone managed to lift prices 3.9 per cent.
Danone still trades on 19 times next year’s earnings to Nestlé’s 22; investors are still willing to pay for stocks exposed to the emerging market consumer. And Danone’s guidance that full-year sales will be 4-5 per cent higher seems plausible, as indeed does a slightly improved operating margin, given its success with price increases. Of course, higher milk and packaging prices could sour things from here.
Source: Financial Rewiev
